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Market Update

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Posted: 6/20/2018 4:15 PM EDT

Nasdaq Hits Intraday Record with Trade Tribulation on Pause

U.S. stocks traded mostly higher, with the Dow dipping and the Nasdaq hitting a fresh all-time intraday high as trade tensions seemed to ease a bit. Treasuries finished lower and reads from the economic docket showed a rise in weekly mortgage apps, but an unexpected decline for existing home sales in May. Crude oil prices were mixed, ahead of this week's OPEC meeting, gold dipped and the U.S. dollar held nearly unchanged. In equity news, FedEx, Oracle and Starbucks offered disappointing guidance and Dow member Walt Disney raised its bid for assets owned by Twenty-First Century Fox.

The Dow Jones Industrial Average (DJIA) declined 42 points (0.2%) to 24,658, the S&P 500 Index gained 5 points (0.2%) to 2,767, and the Nasdaq Composite advanced 56 points (0.7%) to 7,782. In moderately-heavy volume, 776 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil traded $0.80 higher to $65.87 per barrel and wholesale gasoline was down $0.02 at $2.02 per gallon. Elsewhere, the Bloomberg gold spot price ticked $5.32 lower to $1,269.34 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.09.

FedEx Corp. (FDX $251) reported fiscal Q4 earnings-per-share (EPS) of $4.15, or $5.91 ex-items, versus the $5.70 FactSet estimate, as revenues rose 10.2% year-over-year (y/y) to $17.3 billion, compared to the expected $17.2 billion. FDX issued current year EPS guidance that appears just shy of expectations, excluding certain items that make it unclear if it is comparable to the Street's forecasts. Shares traded lower.

Oracle Corp. (ORCL $43) posted Q4 EPS of $0.82, or $0.99 ex-items, versus the projected $0.94, with revenues growing 3.0% y/y to $11.3 billion, versus the estimated $11.2 billion. ORCL issued a Q1 EPS outlook that came in below expectations. Shares were solidly lower.

Starbucks Corp. (SBUX $52) saw some pressure after the company issued Q3 same-store sales guidance that came in a bit shy of the Street's expectations, while it lowered its full-year EPS outlook.

Walgreens Boots Alliance Inc. (WBA $68) announced that it will replace General Electric Co. (GE $13) in the Dow Jones Industrial Average effective prior to the open of trading on Tuesday, June 26. WBA finished higher and GE dipped.

Dow member Walt Disney Co. (DIS $107) announced that it has raised its bid for assets of Twenty-First Century Fox Inc. (FOXA $48), to $38.00 per share from about $28.00 per share, trying to trump a separate proposal of $35.00 per share made by Comcast Corp. (CMCSA $33) last week. FOXA said it has entered into an amended and restated merger agreement with DIS. Shares of FOXA gained solid ground, while DIS and CMCSA also traded higher.

Existing home sales unexpectedly dipped, mortgage applications rise

Existing-home sales in May declined 0.4% month-over-month (m/m) to a 5.43 million annual rate, compared to the Bloomberg forecast of a 5.52 million pace, and versus April's downwardly revised 5.45 million rate. Sales of single-family homes declined 0.6% m/m, and were 3.0% below year-ago levels, while purchases of multi-family structures increased 1.6%, and were down 3.1% y/y. The median existing-home price was up 4.9% y/y at an all-time high of $264,800, marking the 75th straight month of gains. Unsold inventory came in at a 4.1-months pace at the current sales rate, down from 4.2 months a year ago. Inventory of homes for sale increased 2.8% m/m but was still 6.1% lower y/y. Sales declined in the Midwest, South and the West, and were up in the Northeast. Existing home sales account for the majority of the housing sales market.

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) that releases the report, said a solid economy and job market should be generating a much stronger sales pace than what has been seen so far this year. However, he added that incredibly low supply continues to be the primary impediment to more sales, but there’s no question the combination of higher prices and mortgage rates are pinching the budgets of prospective buyers, and ultimately keeping some from reaching the market. For a look at the impact of the Fed's tightening campaign, check out our article, Fed Rate Hike: What Does It Mean for Your Portfolio?

The MBA Mortgage Application Index rose 5.1% last week, following the prior week's 1.5% decline. The increase came amid a 6.1% gain for the Refinance Index, which was met with a 4.3% rise in the Purchase Index. The average 30-year mortgage rate was unchanged at 4.83%.

Treasuries dipped, with the yield on the 2-year note ticking 1 basis point (bp) higher to 2.56%, and the yields on the 10-year note and the 30-year bond rising 4 bps to 2.93% and 3.07%, respectively.

Treasury yields ticked higher and the global stock markets recovered a bit from the recent trade-fueled pressure, while the U.S. dollar paused amid the escalated trade tensions between China and the U.S., as discussed in our article, Trade Tensions Heat Up: What Does It Mean for Investors?. Also, the markets are grappling with the Fed continuing its gradual tightening campaign, the European Central Bank getting closer to starting on the path to policy normalization, and European political turmoil, which come amid the backdrop of a solid domestic economic picture and some signs of softness across the pond in Europe.

As noted in the latest Schwab Market Perspective: Rough Waters for Summer?, trade concerns are ramping up; and although the major global players look able to withstand at least some trade stress, the margin for error is narrowing. Also, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article,Debt Song: It's Not a Pretty Tune, expected stronger economic growth is a good thing, but it’s also bringing tighter monetary policy, which has implications for servicing the rising burden of debt.

Tomorrow, the U.S. economic calendar will yield weekly initial jobless claims, expected to have ticked higher by 2,000 to a level of 220,000, along with the Philly Fed Manufacturing Index, with forecasts calling for a decline to 29.0 m/m in June following May's read of 34.4. After trading begins we'll receive the Conference Board's Index of Leading Economic Indicators (LEI) for May, anticipated to have increased 0.4% m/m, matching the rise seen in April.

Europe and Asia mostly rebound from trade-fueled pressure

European equities mostly recovered from a recent slide, with the global markets appearing to get a reprieve from the selling pressure that has been fueled by the escalated trade tensions between the U.S. and China. Soothing comments from China's central bank seemed to help the recovery, though the markets came off of the best levels of the day and were likely cautious as trade tensions remain elevated, the Bank of England is expected to announce its monetary policy decision tomorrow, and OPEC is gathering with a potential production decision looming later this week. Central bank leaders from the U.S., Europe and Japan held a panel on policy today, offering varying reasons for low wage growth and inflation, while appearing to agree that trade tensions pose serious threats to their economies, per Bloomberg. The euro dipped versus the U.S. dollar, while the British pound ticked higher and bond yields in the region mostly nudged higher. The U.K. held a key vote on Brexit, which resulted in the Parliament getting final say on the terms in which the U.K. leaves the European Union. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, Are Stocks Taking a GAP Year?, that gains in the global stock market have taken time off this year to consider GAP concerns: growth, agreements, and policy, but the gap year for global markets may not last a full year if the growth and trade concerns become temporary and fiscal policy stimulus moderates monetary policy tightening.

Stocks in Asia rebounded from a string of losses that have come from heightened trade tensions between the U.S. and China that has hamstrung the global markets as of late. The yen gave back some of a recent rise, helping to boost Japanese equities. Shares trading in both mainland China and Hong Kong advanced, with the People's Bank of China noting that it will comprehensively use all kinds of monetary policy tools in an apparent attempt to calm investor fears that have been rattled by the recent equity selloff. South Korean stocks rose, Australian securities gained solid ground and Indian shares also traded higher. Amid the choppiness in the global markets that has weighed on emerging market stocks, Schwab's Jeffrey Kleintop offers his recent article, Emerging Market Stocks: From Front-Runner To Dark Horse?.

The international economic docket for tomorrow will include machine tool orders from Japan, PPI from South Korea, business confidence from France and the aforementioned monetary policy decision from the Bank of England.

Schwab Center for Financial Research - Market Analysis Group

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